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Table 1. Measures Selected, Formulas, and Reasons for Selection

Measure Name

Definition

Formula

Importance

Favorable Direction

Current Ratio

Compares assets readily available to the provider with the
debts that must be paid soon.

Current Assets ÷ Current
Liabilities

One of the most important measures of financial liquidity. It captures the most
crucial aspect of a provider's ability to survive over the short-term. For
most healthcare facilities, current assets turn into cash within 1 year or
less and current liabilities are due within 1 year or less.

Acts as insurance to the creditors against an interruption
in the providers' operating cycle. It insulates creditors against slow
payment or no payment. It also provides additional information about the
provider's financial stability that is not available solely using the current
ratio.

More is better; however, the amount needed depends on
other factors, such as the size of the provider.

Defensive Interval

Measures how many days a provider could meet its expenses
without securing any additional revenue.

Is useful because the failure of a provider is often
preceded by a liquidity crisis. Although the current ratio and
working capital provide a crude measure of liquidity, the defensive interval
is a more stringent test that measures how quickly a provider may go through
its cash equivalents, receivables, and reserves.

Higher is better; although it is unlikely that a provider
would lose all sources of income, it does show whether a provider is
vulnerable to revenue disruptions.

Return on Equity

Measures the increase in net assets from year to year.

(Current Net Assets -
Net Assets
at the end of last year) ÷Current
Net Assets

A good predictor of the ability of the provider to sustain
its level of growth. In addition, it provides valuable information in three
main areas—profitability, asset management, and financial advantage. Represents
management's ability to balance these three areas, indicates management's
ability to achieve an adequate return on equity, and thus predicts continued
growth of the provider.

Higher is better; growth in equity allows for growth in
services.

Debt to Equity
Ratio

Measures total amount of debt as compared to the net
assets.

(Current
Liabilities +Long-term
Liabilities) ÷Net
Assets

Measures the ratio of total debt (liabilities) to
provider's net assets. It is a guide as to whether the existing assets could
cover or pay for all of a provider's debt.

Lower is better; this measure reassures lenders that loans
are safe.

Return on Assets

Measures the increase in total assets from last year to
the current year.

The best overall measure of the provider's performance,
showing the profit that the provider is able to generate using all of its
resources including staff, inventories, plant, and equipment, regardless of
how they finance them. Unlike the return on equity, the return on assets
evaluates performance but without considering long-term debts, such as
mortgages.

Higher is better; this is a good indicator of the
provider's efficiency.

Shorter is better; delays in paying bills may cause other
expenses (such as late payment fees).

Accounts Receivable
Days

Measures how long the provider takes to collect on service charges.

(Net Patient Accounts Receivables x 365) ÷Net Patient Revenue

Provides useful information on the effectiveness of the
collection process, the aging of receivables, the average days to pay by
patients and other third-party entities, and changes in the receivables cycle.

Shorter is better; fast bill collection reduces the need
to have large amounts of cash.

Uncollectible
Accounts Receivable Ratio

Measures the proportion of the provider's bills that they
do not collect.

Evaluates the extent to which the provider is pursuing
payment from other sources. For a non-profit provider, this is a good
indicator of the degree that they are working to ensure that care intended
for the medically indigent is actually going to that population.

Lower is better; all bills created by the provider should
be paid.

Average Age of Facility

Measures the wear and tear on provider's buildings and
equipment.

Accumulated
Depreciation ÷Current
Year Depreciation Expense

Forecasts the need for capital outlays and current capital
expenditures.

Lower is better; a high ratio implies that the addition of
major investments will be needed soon.

Net Patient Revenue
as a Percentage of Total Expenses

Measures the provider's income from billing as compared to
costs.

Net Patient Revenue ÷Total Expenses

Assesses the ability of the provider to support operations
without Federal, State, or local grants and other contributions.

Higher is better; grants funds always carry some risk that
funds will be lost for some reason.